2.5 external influences Flashcards
What is the definition for consumer demand?
the levels of spending by customers in general (not just the demand from one customer)
What is the definition of discretionary income?
a persons income after deducting taxes and fixed payments such as rent and utility bills
What is the definition of economic climate?
The atmosphere surrounding the economy (for example doom and gloom, or optimism and boom)
What is the definition of GDP (Gross Domestic Product)?
Is the value of all the goods and services produced in a country in a year
What is the definition of recession?
two or more quarters of negative economic growth
What are 5 factors that help create an economic climate?
- the business cycle
- changes in inflation
- changes in interest rates
- changes in exchange rates
- changes in taxation and government spending
What is the definition of real? (as in real wage cuts)
changes in money, for example wages, excluding the distorting effect of changes in prices. So a fall in real wages might be that wages are unchanged but the prices have risen
What 3 effects does inflation have on businesses?
- Firms with large loans benefit from inflation because inflation erodes the real value of money owed. So when they have to repay the loan it doesn’t feel as painful because of the fall in the value of money.
- Inflation can damage profitability, especially for firms that have fixed-price contracts that take a long time to complete.
- If costs are rising faster in Britain than prices elsewhere, UK companies will find they are losing their ability to compete
Why is the level of interest rates for firms very important? (3)
- It affects consumer demand, especially for goods bought on credit, the higher the rate of interest, the lower the sales that can be expected
- the interest charges affect the total operating costs
- the higher the rate of interest, the less attractive it is for a firm to invest money into the future of the business
When the value of the pound appreciates, what are the impact on exports and imports?
UK exports get pricier , so sales volumes slip
Imports to the UK get cheaper, making it harder for British firms to compete
When the value of the pound depreciates, what are the impacts on imports and exports?
UK exports become cheaper, so sales volumes rise
Imports to the UK get more expensive, so UK firms can compete more effectively
What is the impact of high exchange rate on firms with large export markets?
UK firms that sell a large proportion of their output overseas will prefer a low exchange rate, it would have to increase the price of the product to maintain the same level of profit, which would in turn lower sales
What is the impact of a high exchange rate on firms that import most of their raw materials or stock?
They like a high exchange rate. This is because they buy imports more cheaply, allowing it to make more profit per item
What happens to help reduce the level of unemployment when the government spending is up?
Extra spending on road building, health and other services with a big workforce
What happens to help reduce the level of unemployment when the government puts taxes down?
Reduce income tax to enable families to keep and spend more of the money they earn
What happens to cut the growth rate when it is rising too fast when the government puts spending down?
Cut the spending on health, education and defence, to take bit of spending from the economy
What happens to cut the growth rate when it is rising too fast when the government puts taxes up?
Increases income tax to force people to think harder and more carefully about what they buy
What happens to improve the competitiveness of British firms when government spending is up?
There is extra spending on education
What happens to improve the competitiveness of British firms when the government puts taxes down?
it cuts company taxation (corporation tax)
What happens to cut the rate of imports, especially consumer goods when government spending is down?
Benefits are cut (e.g. state pension) to cut peoples ability to buy imports
What happens to cut the rate of imports, especially consumer goods when government puts taxes up?
Increase VAT on all goods other than food and drink
How are real incomes measured?
By deducting price rises from the changes in peoples incomes
What are the five main areas in which the law affects businesses?
- consumer protection
- employee protection
- environmental protection
- competition protection
- health and safety
What is consumer protection?
is a law designed to ensure that consumers are treated fairly by the companies from which they buy
What are the three Acts of Parliament that are especially important for consumer protection?
- The sale of goods act - law says ‘goods must be fit for the purpose for which they are sold’
- The trade descriptions act - It forces companies to ensure every claim and statement about a product is true
- consumer credit act - regulates credit card purchases but also gives you protection when you enter into a loan or hire agreement
What is employee protection?
Employee law aims to protect the rights of employees at work
What are the 5 key areas of employment law?
- minimum wage
- right to a contract of employment
- increased right to sick, maternity and paternity leave
- redundancy
- trade union rights
What are implications of minimum wage for firms?
Increased labour costs, which may lead to increased automation in the longer term and increased unemployment. However employees may be more motivated by a fair wage satisfying basic needs
what are the implications of a right to a contract of employment for firms?
Meets employees security needs but can reduce employers flexibility in how they use their staff
What are the implications of increased right to sick, maternity and paternity leave for firms?
increased cost of paying for cover for these staff, however staff may feel more valued as they feel well treated by employers, reducing staff turnover levels, which saves costs of recruiting new staff
What are the implications of redundancy for firms?
reducing capacity becomes expensive due to stator payments to staff made redundant, this can mean that closing a factory or office has a negative impact on cash flow in the short term
what are the implications of trade union rights for firms?
employers can be forced to deal with a trade union if enough staff are members, this brings benefits as well as drawbacks
What are the two most important pieces of environmental legislation?
- landfill tax - forces businesses to pay £80 per tonne of to deposit. It encourages businesses to minimise and recycle waste instead of dumping it.
- The environmental protection act- sets out the structure of waste management and emissions control for the UK
What is a competition policy?
It makes sure that no large competitors force out smaller competitors. This is illegal
What is the CMA and what do they do? (3)
- investigate merges and takeovers
- investigate possible anti-competitive practices
- bringing criminal proceedings against individuals who commit cartel offences
what does the health and safety legislation do?
it is designed to ensure the safety of employees and customers within the workplace. this provides a safe working environment for employees
What is the definition of cartel?
an agreement between producers to control supply and demand and thereby control prices. This is illegal, it not unusual
What is the definition of laissez faire?
literally means ‘let it be’, implying leaving businesses free to chose their own policies and practices, trusting in the free market
What is the definition of an oligopoly?
markets dominated by a few large companies
What is the definition of collusion?
when mangers from different firms get together to discuss ways to work together to restrict supply and/ or raise prices
What is the definition of non-price competition?
all competitive strategies other than price, such as branding, product design and technological innovation
what is the definition of predatory pricing?
pricing low with the deliberate intention of driving a competitor out of business
what are some responses of businesses to a changing competitive environment? (3)
- price cutting
- increase product differentiation
- collusion
What are two ways a product can increase differentiation?
- design change
2. a unique selling point
what is the definition of monopoly?
the exclusive possession or control of the supply or trade in a product or service. to dominate they need more than 25% of the market
what is the definition of a duopoly?
A situation in which two suppliers dominate the market for a product or service
what is the definition of a oligopoly?
a state of limited competition, in which a market is shared by a small number of producers or sellers
what is the definition of monopolistic competition?
Characterises an industry in which many firms offer products/ services that are similar but not perfect substitutes. they differentiate from each other
What is the definition of perfect competition?
the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers
Give one strength and one weakness of a monopoly
strength - monopolies make lots of profit, which can be used for R&D
weakness - lack of competitors may lead to low quality and outdated goods and services
Give one strength and one weakness of a duopoly?
strength - likely to both invest lots in R&D to come up with new products
weakness - little option available for consumer - ether one or another
Give one strength and one weakness of a oligopoly?
strength - generates high profits with little competition
weakness - makes it harder for smaller businesses to enter the market
Out of monopoly, oligopoly, duopoly and monopolistic competition, which has the highest barrier to entry?
monopoly is the highest whilst perfect competition is the lowest
What are the porters 5 forces, which analyse the level of competition within an industry?
- supplier power
- buyer power
- competitive rivalry
- threat of substitution
- threat of new entry
what is the definition of inflation?
It is the rate at which the general levels of prices for goods and services are rising and consequently the value of money falls
what 3 effects does inflation have on a business?
- business uncertainty as there is low confidence because they cannot be sure of the costs of goods and services
- firms with large loans benefit as they pay less back, so its not as costly for them
- borrowing costs increase for businesses and people needing loans and mortgages
What is the definition of interest rates?
The cost of borrowing money, expressed as a percentage of the loan amount
Why are the levels of interest important for a business? (3)
- affects consumer demand, especially for goods bought on credit, the higher the rate of interest, the lower the expected sales
- interest charges affect the total operating costs
- the higher the rate of interest the less attractive it is for a firm to invest money into the future of the business as there is risk of falling demand
What is the definition of exchange rates?
It has two components, the domestic currency and foreign currency, and can be quoted either directly or indirectly. It is the value of the currency
What is the impact on firms with a high exchange rate?
If the pound falls in the UK the foreign countries like this as it means that they get their product cheaper than they would otherwise
What is the impact on firms with a high exchange rate on firms which import most of their raw materials or stock?
They would usually like a small pound as it means they get their products cheaper from abroad as the rate reduces the cost of buying goods
What is the impact on firms with a low exchange rates?
the impacts of a weak exchange rate are the reverse of a strong exchange rate, exporters specifically, manufactures can be damaged by a strong exchange rate
what is the definition of taxation?
the money paid as tax
What are the two types of tax?
- corporation tax
2. income tax
What are three things corporation tax can be made on?
- Doing business
- investments
- selling assets for more than they cost
What must you pay corporation tax on?
on profits from doing business as a limited company, a foreign company with a UK branch or any other incorporated association
What is income tax?
The tax on earned and unearned income of individuals. Income includes earnings from employment, profits from a trade, incomes from pensions and investment such as interest, dividends and rent
What happens when there is high tax? (2)
- low profits
2. prices increase
Give two benefits of using cost to influence pricing?
- easy to calculate
2. price increases can be justified when costs increase
Give two negatives of using cost to influence pricing?
- ignores price elasticity of demand
2. may not take into account competition
What usually happens in a boom in the business cycle? (4)
- results in higher GDP
- lower unemployment
- rising asset prices
- confidence in the market is high
What usually happens in a recession in the business cycle? (4)
- growth is negative
- lower employment levels
- lower incomes
- lower profits for businesses
what usually happens in a slump in the business cycle? (3)
- when the recession is at its lowest point
- there is limited spending by the consumer
- massive fall in output and demand
what usually happens in a recovery in the business cycle? (4)
- the economy returns
- there is rising levels of employment
- higher incomes
- eventually leads to an economic boom
Give two reasons why its important to follow legislation to gain market share?
- resume consumer/ customer confidence
2. employees feel protected
Give two reasons its not important to follow legislation to gain market share?
- marketing is more important to gain market share
2. training of employees is more important
What is the definition of business legislation?
a law or set of laws made by a government for a business
What is the role of business legislation? (3)
- regulate the rights and duties of people carrying out business in order to ensure fairness
- protect people dealing with businesses from harm caused by defective services
- protect investors, creditors and consumers
What are the three sections of the competition policy, and explain them:
- fair competition rules - competition based in factors of price, quality and service
- competitive commission (competition and markets authority)
- penalties issued
What four actions can businesses take to try and compete better?
- looking at rivals pricing
- new products - differentiate and increase product range
- decreasing pricing
- advertising
